Weekend Reads for Global Investors: To QE, or Not to QE?

QE3, or the third round of quantitative easing by the US Federal Reserve, came to an end as expected last week. It turns out that it was not the only headline from QE land, however. Bank of Japan surprised the market last Friday by annoucing an expansion of its current asset purchase program of about 50 trillion yen a year to 80 trillion yen.

The effectiveness of quantitative easing in generating economic growth has increasingly come under question by academics and investors alike. Richard Koo, the prominent economist from Nomura, has long believed that monetary expansion post-recession is far less powerful than fiscal measures in getting the economy back on track. (Watch a video where Richard Koo explained his “balance sheet recession” theory at the CFA Institute Japan Investment Conference this summer.)

The reasoning is somewhat simple at its heart: With asset prices falling after a recession, investors have little incentive to step in and catch the falling knife. So no matter how much money central banks pump into the system, people simply do not want to borrow. This, of course, is drastically different from what typically happens when the economy is heating up: people who already have a house to live in still want to borrow and “invest” in additional housing.

So if it is so obvious, why do central bankers start the QE programs in the first place? The answer is to save us from a 1930s-like depression and the pain it inflicts on normal people’s lives. On that point, there tends to be little argument, whether in academic circles or among practitioners.

The divide comes after the initial rescue, and here’s the Weekend Reads’ version of it: There have been two main camps of macro-economists — the Keynesians and the monetarists. People with a lot of grey hair may still remember something called the “liquidity trap,” a term Keynes invented some 80 years ago. It basically describes a situation when demand falls far short of supply in the economy, adding “liquidity” (i.e., conduct QE programs in today’s terminology) alone won’t be enough to push the economy back to normal. The monetarists believe, in the words of Milton Friedman, “inflation is always and everywhere a monetary phenomenon.” So to reflate the economy, pump money into the system.

I won’t ruin your weekend by going into how monetarists have gotten the upper hand in recent decades and made QE the default choice at the height of the global financial crisis and in the years after. (If you really want to know, by all means leave us a note in the comments section and we’ll cover it in a Weekday Reads for you.) And the point of academic debates is probably moot from most people’s perspective.

All you need to ask yourself is, are you better off after QE2, QE3, and the like?

To QE, or Not to QE?

• A veteran economist from Reuters gave his take on why QE did not work in the United States. “The Takeaway from Six Years of Economic Troubles? Keynes Was Right” (Reuters)
• Here’s a more detailed treatment of the subject matter covering a longer time span and more countries. It’s a delicious read: “John Maynard Keynes Is the Economist the World Needs Now” (BusinessWeek)
• “Reality Might Topple a Beloved Economic Theory” (BloombergView)
• Quantitative Easing Is Ending. Here’s What It Did, in Charts. (The New York Times)
• “Evaluation of quantitative easing” (Econbrowser)
• “How to Talk about a European Recovery That Never Arrives” (Quartz)
• “Challenging Our Assumptions” (MarketAnthropology)
• “Definition Of Insanity: Abe-nomics” (Streettalklive) 
• Richard Koo: “Lessons from Japan: Fighting a Balance Sheet Recession (video)” (CFA Institute Annual Conferences)

Investing 

• No matter whether you are an investor or a trader, it is never a bad idea to revisit the teachings and the story of Jesse Livermore once in a while. “Nine Surprising Things Jesse Livermore Said” (The Reformed Broker)
• “Indiscriminate Passive Investing is One Cause of Major Market Tops” (Price Action Lab Blog)
• “How ETFs and Index Funds Are Winning the War for Your Money” (MarketWatch)
• Jason Zweig at the Wall Street Journal explains what risk tolerance really means. “So You Think You’re a Risk-Taker?” (Wall Street Journal)
• Market timing does not work, no matter if you use short-term predictions or long-term ones: “The Hardest Part” (A Wealth of Common Sense)

Globalization

• The DHL Global Connectedness Index 2014 was released this week. Ghemawat, who was involved in the preparation of the index, summarized a key finding in the article: “The Fortune Global 500 Isn’t All That Global” (HBR Blog Network)
• A picture is worth a thousand words. “This map of international phone calls explains globalization” (Quartz)

Fossil Fuel and Climate Change

• Europe is taking a wait-and-see attitude on a technique that the US shale boom is built on, and that may have far-reaching environmental implications. “Fracking in Europe” (BloombergView)
• “What will Australia look like in 2050 without coal-fired power stations?” (News.com.au)

And Now for Some Truly Weekend Reading . . . 

• “How Emily Post’s Heirs Built an Etiquette Monopoly” (Businessweek)
• “Six Surprising Reasons Why Gratitude Is Great for Your Health” (Real Simple)
• “Who Wrote It: Bill Gross or Russell Brand?” (The Telegraph)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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